41
30) The supply curve for tickets for a sporting event
A) is perfectly inelastic.
B) is vertical.
C) has a price elasticity of zero.
D) All of the above.
31) As prices change, the elasticity of supply describes the movement
A) of a shift in the supply curve.
B) of the equilibrium price.
C) along the supply curve.
D) from a necessity to a luxury good.
32) In the late 1980s, the health benefits of oat bran were widely advertised. If the price of oats increased
50%, causing the quantity of oats supplied to increase by 40%, then the price elasticity of supply was
A) 1.25.
B) -1.25.
C) -0.80.
D) 0.80.
33) If the supply curve for orange juice is estimated to be Q = 40 + 2p, then, at a price of $2, the price
elasticity of supply is
A) .01.
B) .09.
C) 1.
34) If the supply curve for orange juice is estimated to be Q = 40 + 2p, then
A) supply is price elastic at all prices.
B) supply is price inelastic at all prices.
C) supply is elastic only at prices below 20.
D) No general statements about price elasticity of supply can be made.
35) When it comes to the supply curve of janitors and accountants,
A) the supply curve of janitors is more elastic.
B) the supply curve of accountants is more elastic.
C) both supply curves are equally elastic.
D) More information is needed.
36) The supply of movie tickets at one theater’s box office for this Saturday’s 4:30 show of a new movie is
A) perfectly elastic until all seats are filled.
B) unit elastic.
C) perfectly inelastic.
D) elastic.
37) A vertical supply curve exhibits
A) a constant elasticity of supply.
B) a perfectly inelastic supply curve.
C) Both A and B are true.
D) None of the above.
38) A given supply curve has a zero intercept. At the current equilibrium price the price elasticity of
supply equals
A) 1.
B) 0.
C) 2.
D) Not enough information is provided.
39) The price elasticity of supply when the supply curve is Q = 5 is
A) 5.
B) perfectly inelastic.
C) perfectly elastic.
D) Cannot be calculated from the information provided.
40) If demand is given by Q = Ap-b where A and b are positive constants, the absolute value of price
elasticity of demand
A) = b
B) = A
C) = A/b
D) depends on the price
41) The duration of the “short-run”
A) is one year.
B) is the same for all goods.
C) depends on the relative short-run elasticity of demand and supply for the good.
D) depends on how long it takes consumers or firms to adjust for a particular good.
42) Electricity accounts for almost 20% of the cost of making steel. A 10% increase in electricity prices
results in steel firms decreasing production and thereby demanding 5% less electricity. Over many years,
technological innovations can change the way steel firms make steel and reduce the industry’s energy
requirements. This suggests that the steel industry’s short-run elasticity of demand for electricity is
probably
A) less than one in absolute terms in the short run.
B) less than its long-run elasticity of demand for electricity.
C) Both A and B above.
D) Neither A nor B above.
43) Why is the supply of oil more price elastic in the long run?
A) New deposits are found.
B) Better extraction technology.
C) Ability of firms to change the amount of all inputs.
D) All of the above.
44) In the mid-1980s, the salaries of accounting professors with Ph.D.s increased dramatically. This
resulted in an increase in enrollments in Ph.D. accounting programs. Since a Ph.D. degree in accounting
may take at least four years to complete, the short-run elasticity of supply of accounting professors is
A) greater than the long-run-elasticity of supply.
B) less than the long-run elasticity of supply.
C) equal to the long-run elasticity of supply.
D) equal to the short-run elasticity of demand.
45) The rising price of oil has it made feasible to extract oil out of oily sand in Canada. Concerning the oil
market this is an example of
A) a higher price elasticity of supply in the long run.
B) a higher price elasticity of supply in the short run.
C) a higher price elasticity of demand in the short run.
D) an inelastic long-run supply of oil.
46) Which of the following goods probably has the lowest (absolute value) short-run price elasticity of
demand?
A) fresh fruit
B) frozen dinners
C) cars
D) refrigerators
47) The short-run elasticity of supply is less than the long-run elasticity of supply
A) because consumers’ tastes and preferences change in the long run but not in the short run.
B) because producers can adjust the amount of machinery in the long run but not in the short run.
C) only for durable goods.
D) only for non-durable goods.
48) Relative to the short-run demand for gasoline, the long-run demand for gasoline is
A) probably more elastic since people need time to change automobiles and driving habits.
B) probably less elastic since people need time to change automobiles and driving habits.
C) probably more elastic because people can hoard this good.
D) probably less elastic because people cannot store this good.
49) The demand equation Q=.5p-.75 is equivalent to the log-linear demand equations
A) Q = ln(.5)-.75ln(p)
B) ln(Q) = ln(.5)-.75ln(p)
C) ln(Q) = .5 – .75ln(p)
D) ln(Q) = ln(.75) – .5ln(p)
50) If price of product A increases by 10%, and the quantity demanded for product B drops by 50%, then
these two products are
A) substitutes.
B) complements.
C) normal goods.
D) inferior goods.
51) If price of product A increases by 10%, and the quantity demanded for product B drops by 50%, then
the cross price elasticity of the quantity of product A with respect to price of product B is
A) 5.
B) –5.
C) 0.2.
D) -0.2.
For the following, please answer “True” or “False” and explain why.
52) In the case of a linear demand curve, demand becomes more price elastic as price increases.
53) When comparing elasticities between two different linear demand curves, the curve that is flatter has
greater price elasticity at every given price.
54) Because demand curves slope downward according to the Law of Demand, the price elasticity of
demand is a negative number.
55) If a linear supply curve has a zero intercept, the elasticity of supply is always unitary.
56) For all goods, the long run demand curve is always more elastic than the short run demand curve.
57) The short-run price elasticity of demand for refrigerators is relatively inelastic.
58) Assume the market demand for wheat may be written as
Q = 45 – 2p + 0.3Y + 1pb
where Y refers to income and pb refers to the price of barley. Assuming that wheat and barley both sell
for $1, and income is $20, calculate the price elasticity, cross price elasticity and income elasticity for
wheat.
59) Compute the elasticity of demand for the demand curve p = 15Q-0.7. Does the elasticity vary with the
price?
60) Suppose the log-linear demand for widgets is found to be
Ln(Q) = 1.5 – 2ln(p)
According to this equation, a 10% increase in price will decrease Q by what percentage? What is the price
elasticity of demand?
61) Which good would you expect to have a greater price elasticity: a gallon of gasoline sold at a specific
gasoline station on Main Street in Phoenix, a gallon of gasoline sold in Phoenix, or a gallon of gasoline
sold in Arizona? Why?
62) The price elasticity of demand for gasoline is estimated to be -0.2. Two million gallons are sold daily
at a price of $1. Use this information to calculate a demand curve for gasoline assuming it is linear.
63) Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515,
respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is
16.88 billion barrels per year.
a. Derive the (linear) long-run demand and supply equations.
b. Suppose the long-run supply curve you derived above consists of competitive supply plus the
quantity of OPEC supply. If the long-run competitive supply (not including OPEC’s production) is:
QS = 7.78 + 0.29p,
what must be OPECʹs level of production in this long–run equilibrium to maintain the price of $30?
64) Suppose that the current price of oil is $60 per barrel and the quantity sold is 90 million barrels per
day. The current estimates of the price elasticity of supply and demand are η=1 and ε=-.2 respectively.
a. Compute linear equations for the supply and demand.
b. What will be the effects on the market price and quantity if the U.S. government suddenly decides to
purchase an additional 2 million barrels of oil? Assume that the addition consumption of oil by the
government results in a parallel shift of the supply curve to the left by 2 million barrels per day.
65) Suppose the current price and quantity of widgets is p=$50 and Q=125. The demand for widgets is
log-linear and the price elasticity of demand is E=-2. The supply of widgets is perfectly elastic.
a. Derive the equations for the demand and supply of widgets.
b. What would be the effect on the equilibrium price and quantity if demand were to increase by 500
widgets?
66) The demand for labor is given by L(w) =1000 –.5w, where w is the minimum wage. Find the level of w
that maximizes the total wage payment, wL(w). What is the wage-elasticity of labor demand at the
maximizing minimum wage?
67) The above figure shows three demand curves labeled D1, D2, and D3. Rank these three demand
curves in terms of elasticity at a price of c.
68) Explain why when the demand curve for a good is elastic, a one percent reduction in the price of the
good will increase a consumer’s expenditure on the good.
69) Explain why the price elasticity of demand changes along a linear demand curve.
70) Explain whether you would expect the elasticity of supply to be highly elastic or inelastic for fresh cut
flowers and why.
71) Suppose the demand for pork is given by the equation
Q = p-0.5pc0.2
where pc is the price of chicken. Compute the cross-price elasticity of demand for pork
72) The National Association of Business Schools recently required that all business schools must hire
three additional people with Ph.D. degrees in English literature. What is the immediate effect on the
salaries of people with Ph.D.s in English literature? What will be the effect after ten years?
73) Explain why short-run demand for frozen fish sticks may be more price elastic in the short run than in
the long run.
74) Suppose that the current price of oil is $60 per barrel and the quantity sold is 90 million barrels per
day. The current estimates of the price elasticity of supply and demand are η=1 and ε=-.2 respectively.
What will be the effects on the market price and quantity if the U.S. government suddenly decides to
purchase an additional 2 million barrels of oil? Assume that the supply and demand curves are linear and
the addition consumption of oil by the government results in a parallel shift of the supply curve to the left
by 2 million barrels per day.
2.6 Effects of a Sales Tax
1) Suppose the supply curve and the demand curve both have unitary elasticity at all prices. The price
increase to consumers resulting from a specific tax of $1 imposed on sellers will be
A) $1.
B) 50 cents.
C) zero.
D) impossible to calculate without knowing the slope of the supply curve.